I had the privilege of attending the California Self Storage
Association’s owners’ conference in Napa last week. It was a fun time with meaty sessions, warm
weather and good food and fine wine. The
CSSA is a great association that gives its members the type of value that only
comes when there are more “givers” than “takers” in an association. I am always pleasantly surprised how much
Self Storage owners share with each other; a bit different from many other
trade groups.
As a mortgage banker among the self-storage owners, I found
myself addressing two common questions…
What is the lending community’s image of self-storage?
My answer: Excellent among the lenders who have learned this
sector, with more lenders getting on board all the time.
Where are rates today?
My answer: The best they have ever been in my entire
career. We have recently closed several
loans well below 4% fixed for 10-years on larger, well-located self-storage
properties.Greetings from California!
What follows is the start of a chapter I wrote for a book
published by the California Self Storage Association, “Greetings from CA: Best
Practices from the CSSA” It was
written a year ago, but it holds up pretty well. If your read the entire chapter, just keep in
mind that interest rates and cap rates are down 75 basis points since this was
published!
The importance of asking Why? before What? or How Much? *
So you need a loan? You and your partners are buying a self-storage facility or you have a loan coming up for refinance. “This should not be too hard.” you say to yourself. Lenders are coming back into commercial real estate and are looking favorably on self-storage as a product type. As we come out of the recent downturn in 2012 self-storage may not be on top of the heap, but it is near the top. Self-storage has a relatively low rate of foreclosures and a relatively high recovery ratio when loans do go bad. In fact, self-storage weathered the downturn extremely well, except for those doomed facilities built at the top of the bubble near the edge of the exurbs still waiting for the rooftops to appear. Lenders recognize that self-storage does not have the great swings in occupancy and rents experienced by other property types. Lenders can trust self-storage income streams; rents are real and a few years of strong collection reports is better than relying on an office or retail tenant’s credit rating that could be gone tomorrow.
With this favorable financing environment it’s not hard to
get a loan for a stabilized self-storage project, but it is hard to be sure it
is the right loan for your situation.
Efforts to finance without a financing strategy often fall into two
approaches.
Scenario One: Ready! Fire! Aim!
You pick up the phone and call your mortgage banker. He explains there are lots of options
available and presses you for some guidance.
You say. “Show me what is out there.
Get me a variety of quotes so I can see what’s available.” Your mortgage banker pulls favors and runs a
wide variety of lenders through their paces and comes back with a mixture of
quotes that looks to you like apples & oranges; different loan amounts,
rates, loan terms, recourse provisions, prepayment penalties, impounds and
other lender controls, and different amortization periods, all from lenders
with various reputations as to surety of execution and loan servicing behavior.
You want to keep things simple so you focus on only one of the many financing
variables (usually the interest rate or total loan proceeds) and compare the
options that way. You pick a lender and
financing structure that you worry you later may regret, but can’t quite put
your finger on what is bothering you.
Scenario Two: Ladies and Gentlemen, Start your Engines!
This scenario is even worse than a single mortgage banker
casting around without guidance, you and your partners start the financing
search by each partner taking the initiative, dialing for dollars, calling
multiple mortgage brokers and banks. The
competing mortgage brokers get into a footrace to reach lenders before the
other guy, so they can protect their fee.
Their packages are sketchy and inaccurate because they prepared them in
haste. Their presentation of your story
is fragmented, poorly rendered and the unprofessionalism reflects on you and
your project. The various banks
contacted by your partners are competitive and jealous of each other and feel
disrespected, but still begrudgingly prepare preliminary term sheets. The quotes come in, with each source selling
their solution and disparaging all other approaches. Your partners each champion their financing
sources and take it personally that you will not direct the financing to their
favorite bank. The quotes are hard to
compare because they were based on different NOI projections and different
financing requests. You feel you are
only getting half the story and you don’t like the pressure tactics from the
lenders and brokers competing to secure the business. Given this chaos how do you have confidence
in your choice of lender and loan structure? "TO PURCHASE: http://www.ministoragemessenger.com/cart/shopexd.asp?id=2484
Voted the 2011 Best State Association, the California Self Storage Association counts among its members some of the most experienced operators, property managers and marketing experts in the self-storage industry.
